Economic Daily Outlook

Nearly six years after home prices started falling, more U.S. housing markets appear to be nearing a new phase: a prolonged bottom.

Hitting a bottom, of course, isn’t the same as a full-fledged recovery, which is still years off for many housing markets—as well as for millions of people who purchased homes or took cash out during the bubble.

The good news is that housing construction and home sales appear to have hit a floor. Home builders cut back heavily in the past four years and began construction on just 434,000 single-family homes last year, the lowest level on record. Research firm Zelman & Associates estimates builders will start construction on 540,000 homes this year, a 24% increase.

New-home sales during the first quarter posted double-digit gains from the previous-year period. A rebound here is likely simply because “we’ve starved the market for new-home construction,” said Ivy Zelman, the firm’s chief executive.

Sales of previously owned homes, meanwhile, are up 32% from their low point of mid-2010, when sales plunged following the expiration of home-buyer tax credits.

That leaves prices as the last measure that hasn’t yet stopped falling. But there are signs of progress on that front, too, as the pace of declines is slowing.

Once again Europe’s efforts to contain its crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s longer-term refinancing operation to provide nearly $1tn in cheap three-year funding to European banks would halt the crisis for a while if not resolve it. It is now clear it has been little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns while foreigners have sold down their holdings. Markets see banks grow ever more nervous. Again, both Europe and the global economy approach the brink.

In any policy sphere a great debate always follows signs of failure. The architects of the current policy and their allies argue that the problem lies in insufficient determination to maintain the existing strategy. Others argue for a change in course, a view that seems to be taking hold among European electorates – and rightly so. There is a good chance that much of what is being urged is likely to be not just ineffective but counterproductive in terms of maintaining the monetary union, restoring normal financial conditions and government access to markets, and re-establishing growth.

The Obama administration’s move to scrap a plan that would prevent some children from working in dangerous farm jobs drew sharp rebukes Friday from child-welfare advocates who claim the president caved in to election-year pressure from farmers and Republicans.

The Labor Department spent more than a year working on the proposal to ban children younger than 16 from using power-driven farm equipment — including tractors — and prevent those under 18 from working in grain silos, feed lots and stockyards.

Labor officials tried to avoid controversy by specifically excluding children who worked on their parents’ farms. But the proposal became a popular political target for Republicans who called it an impractical, heavy-handed regulation that ignored the reality of small farms.

The growth of health spending has slowed substantially in the last few years, surprising experts and offering some fuel for optimism about the federal government’s long-term fiscal performance.

Much of the slowdown is because of the recession, and thus not unexpected, health experts say. But some of it seems to be attributable to changing behavior by consumers and providers of health care — meaning that the lower rates of growth might persist even as the economy picks up.

Because Medicare and Medicaid are two of the largest contributors to the country’s long-term debts, slower growth in health costs could reduce the pressure for enormous spending cuts or tax increases.

In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services. After years of taking up a growing share of economic activity, health spending held steady in 2010, at 17.9 percent of the gross domestic product.

The growth rate mostly slowed as millions of Americans lost insurance coverage along with their jobs. Worried about job security, others may have feared taking time off work for doctor’s visits or surgical procedures, or skipped non-urgent care when money was tight.

Still, the slowdown was sharper than health economists expected, and a broad, bipartisan range of academics, hospital administrators and policy experts has started to wonder if what had seemed impossible might be happening — if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve.

President Obama’s top energy and environmental officials are casting their work as a core piece of White House efforts to boost the economy while using rough-and-tumble language to parry Republican attacks.

Four speeches over four days by Interior Secretary Ken Salazar and EPA Administrator Lisa Jackson’s signal a political all-hands-on-deck approach to defending the White House’s economic record ahead of the 2012 elections.

“The fact is we can’t create an economy that is built to last by putting our nation into a race to the bottom, a race for the weakest health protections and the most loopholes in our environmental laws,” Jackson said Friday in criticizing GOP proposals to kill or delay several regulations.

The tactic signals the extent to which the White House response to criticism over high gasoline prices, green energy spending and environmental rules is extending well beyond a recent series of speeches by the president.

As high school seniors wrestle with big decisions before Tuesday’s deadline about which college they want to go to, some of the nation’s top liberal arts colleges are dealing with big decisions of their own. Many of the most elite private schools are trying to figure out how they may have to adapt at a time when they’re seen as a more expensive — and less direct — path to landing a job.

The worries are both existential and financial — even the most wealthy and well-established liberal arts schools are concerned about how they can afford to keep offering the same small, intimate classroom experience, and low faculty-student ratios that they are known for.

The growing cost of financial aid is also a big concern. These elite schools typically have more kids on campus with grants and loans than those paying full sticker price, so colleges end up collecting just about half what they charge. Even schools with big endowments worry about how they can afford to keep offering such discounts. But with liberal arts schools insisting that diversity is as important to the educational experience they offer, they also can’t afford not to.

After a winter of alarm over the possibility that a military conflict over the Iranian nuclear program might be imminent, American officials and outside analysts now believe that the chances of war in the near future have significantly decreased.

They cite a series of factors that, for now, argue against a conflict. The threat of tighter economic sanctions has prompted the Iranians to try more flexible tactics in their dealings with the United States and other powers, while the revival of direct negotiations has tempered the most inflammatory talk on all sides.

A growing divide in Israel between political leaders and military and intelligence officials over the wisdom of attacking Iran has begun to surface. And the White House appears determined to prevent any confrontation that could disrupt world oil markets in an election year.

“I do think the temperature has cooled,” an Obama administration official said this week.

At the same time, no one is discounting the possibility that the current optimism could fade. “While there isn’t an agreement between the U.S. and Israel on how much time, there is an agreement that there is some time to give diplomacy a chance,” said Dennis B. Ross, who previously handled Iran policy for the Obama administration.

“So I think right now you have a focus on the negotiations,” he added. “It doesn’t mean the threat of using force goes away, but it lies behind the diplomacy.”